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    Expected growth rate of a stock

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    IBM just paid (t=0) a $2.00 dividend. The required rate of return for IBM stock is 22%. If a price of a share of IBM is expected to be $82.1516 at the end of year 2 (t=2), what is IBM's expected growth rate?
    possible answers:
    a)16% b)11% c)11.5% d)18% e)10.5%
    f)14.5% g)16.5% h)12% i)22.5% j)13.5%

    © BrainMass Inc. brainmass.com December 24, 2021, 5:06 pm ad1c9bdddf
    https://brainmass.com/business/finance/expected-growth-rate-stock-28629

    SOLUTION This solution is FREE courtesy of BrainMass!

    Answer: d)18%
    D0 = $2.00
    D1 = 2(1+g)
    D2 = 2(1+g)^2
    D3 = 2(1+g)^3
    P2= Div3/ (r-g)

    P2= 82.1516
    r= 22%

    Therefore 82.1516= 2 (1+g)^3/ (22%-g)
    Solving this equation
    g= 18%

    Check

    P2= Div3/ (r-g)

    Div3 = 3.286064 =2x(1+18%)^3
    r= 22%
    g=
    Po= 82.1516
    There is one unknown g; solving for g ,
    g= 18.%

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 5:06 pm ad1c9bdddf>
    https://brainmass.com/business/finance/expected-growth-rate-stock-28629

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